A Forgettable Year for Equities

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Unfavourable economy policies, delay in signing of 2016 budget and the energy crisis resulted in the poor performance of the stock market during the first year of President Muhammadu Buhari, writes Goddy Egene

The Nigerian stock market has performed poorly under the government of President Muhammadu Buhari, which is a reflection of the general economic situation. When President Buhari was announced winner of the 2015 Presidential Elections on March 31, 2015, the market recorded gains in 10 straight days. However, after his swearing on May 29, the market began to decline as investors remained in the dark about the economic policies of the government.

Also, many investors exited the market due to poor corporate earnings, and Central Bank of Nigeria (CBN)’s forex policies. Consequently, the market has suffered a decline of 16 per cent within one of Buhari’s administration. The Nigerian Stock Exchange (NSE) All-Share Index, which stood at 34,310.37 on eve of May 29, 2015 fell to 28, 902.25 one year after.

While Buhari raised the hopes of Nigerians during his campaigns, a blurry fiscal direction, declining oil prices, policy reversal by the Central Bank of Nigeria (CBN), foreign exchange restriction, all contributed to keep many investors watching the market without investing. Hence, the poor performance in the first year of the government.

NSE’s Optimism
Having recorded a negative growth of 17.4 per cent in 2015, the NSE had expected that market would improve this year. The Chief Executive Officer of the NSE, Mr. Oscar Onyema had said that with greater clarity on policy direction, they anticipated the return of investors who had remained on the sidelines throughout 2015.

“This return is predicated upon return of investor confidence as a result of: effective implementation and communication of the government’s economic blueprint; credibility in monetary policy stance; relative stability in the macro economy (oil price stability above benchmark targets, increase in tax collection to gross domestic product among others) and improved security,” he said.
Speaking on the focus of the NSE in 2016, Onyema said the exchange would focus on executing its strategy in order to continue to provide a credible platform for financing the economy.

“To this end, we intend to intensify engagement efforts with the federal government. We have also prioritised three initiatives for 2016 aimed at achieving the exchange’s three strategic objectives of increasing the number of new listings across five asset classes, increasing order flow in the five asset classes operating a fair and orderly market based on just and equitable principles,” Onyema said.

The NSE CEO said the current state of the market creates both challenges and opportunities for investors.
“We believe that taking a portfolio approach to investing provides the best risk adjusted alternative for participating in the capital market. As such, we want to ensure that the NSE provides a repertoire of products that will allow investors to create well diversified portfolios of uncorrelated asset classes,” he said.

The expectations of the NSE were not met throughout the first quarter (Q1) as the market remained under pressure of weak demand for stocks from both domestic and foreign investors and poor corporate earnings for 2015 financial year.

Exit of foreign investors
In recent times the market has been dominated by foreign investors and with successful completion of the elections and swearing in of Buhari, it was expected more foreign investors would be attracted to the market. However, forex restriction and exchange rate volatility affected the participation of foreign investors, leading to the exit of investors.

For in instance, equities transactions figures released by the NSE for the month of January and February in 2016 showed that foreign portfolio investors (FPI) decreased. While total transactions on the bourse increased from N84.10 billion in N117.27 billion, FPI fell 51.57 per cent to 36.48 per cent of the transactions.

Besides, monthly foreign outflows outpaced inflows, which was consistent with the same period in 2015. Foreign outflows increased by 20.79 per cent from N26.36 billion in January 2016 to N31.84 billion while foreign inflows decreased by 35.68 per cent from N17.01 billion in January 2016 to N10.94 billion in February 2016.

While the total domestic transaction increased by 82.89 per cent from January to February 2016, retail investors are reducing. The institutional investors composition of the domestic market increased by 75.05 per cent from N21.85 billion in January to N38.25 billion in February while the retail composition increased by 91.95 per cent from N18.88 billion in January to N36.24 billion in February 2016.
In all, retail investors still account for 47 per cent, while institutional investors account for 53 per cent. Out of the N115.22 billion domestic transactions, institutional investors account for N60.10 billion, while N55.12 billion.

Poor financial results
Normally impressive financial performance of companies influences investors’ patronage of stock market. When companies post improved results and declare higher dividends, more investors get attracted. However, since the current government took over, the hostile operating environment has negatively affected performance of most listed companies with leading financial institutions reporting massive decline in bottom lines.

Banks such as FCMB Group, FBN Holdings Plc, Diamond Bank Plc, Ecobank Transnational Incorporated and Skye Bank Plc sent profit warnings. Also Courtville Business Solutions Plc, Computer Warehouse Group Plc dampened investors’ enthusiasm with poor results.
Investors’ reactions to the profit warnings by banks led to the sector recording the highest decline in Q1. The NSE Banking Index went down by 19.25 per cent in the quarter.

The banks attributed their poor states to the challenging business environment, which that it is believed stemmed from poor economic strategies of the Buhari’s administration.
For instance the Managing Director of FCMB Group Plc, Peter Obaseki, had said the lower earnings resulted from spike in impairments particularly in the energy sector and the significant reduction in trade finance-related revenues due to foreign exchange illiquidity.

The Group Managing Director/CEO, First City Monument Bank Limited, a key subsidiary of FCMB Group Plc, Mr. Ladi Balogun, said: “The commercial and retail banking arm of the group saw a significant drop in profitability for the full year to N6.5 billion PBT, following the impairments from two significant defaulting obligors reported in our Q3 audited results. The full year’s performance was also adversely affected by a 44 per cent drop in foreign exchange income and a 12 per cent drop in net interest income, largely caused by foreign exchange policy and impact of cash reserve requirement ratios till Q4.”

On its part, FBN Holdings said:“The reduction in earnings is as a result of the recognition of impairment charges on some specific accounts resulting from a reassessment of the loan portfolio within our commercial banking business. This reassessment was driven by the challenging macro environment coupled with fiscal and monetary headwinds, which have resulted in marked reduction in domestic output. This is a prudent measure being taken while the bank has commenced active remedial action on the specific impaired accounts,” the bank said.

In the case of Diamond Bank said the continuing deterioration in Nigeria’s macro-economic conditions has resulted in bank recognising higher than expected impairment charges on loans made to the energy and commercial business sectors.
Similarly, ETI said the macroeconomic challenges faced by most African economies, lower crude oil prices, depreciating currencies, monetary and fiscal bottlenecks, due to global developments, negatively impacted revenue growth.

“Thus, revenue growth for 2015 will be below our target guidance. Higher impairment losses on loans were recognised in the last quarter of 2015 across its loan portfolio. Key actions have been implemented to strengthen our credit risk management processes. As a result, our revised growth targets communicated during our third quarter 2015 analysts and investor conference call for deposits and loans will not be achieved. We also expect our efficiency and asset quality metrics to be worse than targets. Based on the aforementioned, we expect our full year 2015 profit in US dollar terms to be lower than the nine-months to 2015 reported profit,” ETI said.

The lull in the oil industry and real estate sector of the nation’s economy has impacted negatively on the operations of Skye Bank Plc. Consequently, the bank is expected to report decline in profit for the financial year ended December 31, 2015.
In a profit warning notification to the capital market community, Skye Bank Plc attributed the expected decline in performance to recognition of increased impairment on loans to sectors severely affected by the prevailing economic headwinds which are yet to abate, especially the lull in oil & gas and real estate sectors.

“While this cautious approach has been adopted, we have designed and commenced appropriate remedial processes to salvage the affected assets as soon as possible. Full details of the Group’s financial performance will be disclosed after regulatory approvals of the financial statements. We remain committed to our focus on supporting the growth of the retail and small and medium scale enterprise (SME) sectors amongst others,” the bank said.

Analysts’ comments
The Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, said that the banking sector can only be as healthy as the economy itself, noting that the economy was going through turbulence, therefore banking sector would also feel the impact of the turbulence.

“Some banks have reported some very good numbers. But if you distill those numbers, you will find a lot of extra-ordinary items. So, if you take out the extraordinary items, you will find out that, that industry is becoming less attractive and more cannibalistic. Therefore, in the near future, we expect some further turbulence, weaker performance, head count rationalisation and restructuring to take place.

“Again, like I said, you cannot be older than your father. If the economy is in trouble, the banking system would also be in trouble. But the truth is that because the banks are adequately capitalised, they have enough buffers to withstand the shocks. “

Looking at the performance of the market, the CEO of Quest Advisory Services Limited, Mr. Bayo Rotimi said it was affected by the adverse economic climate characterised by declining oil prices, rising inflation, declining capacity utilisation and job losses in the manufacturing sector, uncertainties around devaluation of the naira and the delays to the 2016 budget.

“These have led to weak corporate earnings by listed companies which, in turn, translated to declining stock prices and market capitalisation. In order to stem this downward spiral, I strongly recommend that the federal government urgently signs off on the 2016 budget, announces a detailed economic blueprint; fully deregulates the downstream segment of the petroleum industry; encourages import substitution initiatives and allows for a market determined value of the Naira. This would lead to a reflation of the economy through the commencement of the critical revamp of our dilapidated infrastructure and lay the foundation for an economic resurgence,” Rotimi said.

However, it is believed that following the signing of the 2016 budget and change in the forex policy, the economy will witness a positive turn and thus affect the market as well. The market rose significantly last week as the investors reacted positively the flexible forex policy, a development that is expected to be sustained in the near term.